Forward Guidance Surprises Dominate USD Variance Under Powell
A study of 30 years of Federal Reserve meetings by Commerzbank found that forward guidance surprises have a significant impact on the US Dollar and G10 currencies.
The analysis, which covered the tenures of Alan Greenspan, Ben Bernanke, Janet Yellen, and Jerome Powell, broke down FOMC surprises into policy shocks and information shocks. The study found that forward guidance is only highly significant in the case of policy shocks, explaining 21% of USD variance on meeting days.
Under Powell's chairmanship, the explained variance of the decomposition collapsed completely, rendering both factors insignificant. However, recent years have seen a shift in information from the statement to other components of the FOMC meeting, with the daily change in OIS accounting for 62% of USD variance over the last 21 meetings.
The analysis suggests that Powell's opposition to forward guidance may be a contributing factor to this trend. Warsh has only chaired two meetings so far, but his stated opposition to forward guidance and abstention from voting on dot plots implies that he may follow a different approach than his predecessor.